The Economy and Your IT Job

For the last six months, the US and global media has worked to create a near hysterical environment of fear in the hopes that they would create enought panic to demand change in Washington at all costs. They succeeded.

Now, the repercussions of such a tactic is starting to take hold. Americans' confidence is at the lowest it has ever been. Surveys are showing that many Americans are in despair about the state of their own finances. Every day we either see another major corporation collapse, or we read about some that are on the verge. The media continues to fan the flames regardless of the possible (probable?) outcome.

The $700B (that's $700,000M for you Brits) bailout has been demonized as the worst boondoggle ever despite the fact that the Treasury Secretary has already used and allocated nearly $200B to save banks that were on the verge of collapse. The purpose of the $700B is to stabilize the most fundamental industry in all the worlds' economy. People should not be mad about the $700B, they should be mad about the conditions that lead to this disaster.

Now, the auto industry has finally succumbed to the crushing weight of government interference that started in 1968. For decades, these companies had managed to weather the storm of mandated product changes, relentless competition from abroad, and a union that extorted so much money from these companies that the union is capable of funding its own health care group. Now, GM and Chrysler are both on the brink of bankruptcy. Ford is in better shape, which is an indicator of the value of having family who is personally invested in the well-being of the company involved with its operations. However, all auto manufacturing in America will suffer or be bankrupt if even one of these companies goes into bankruptcy.

The big 3 directly employs over 250,000 employees in the US. Most people don't know that the majority of the parts that go into a car are manufactured by a third party to specifications provided by the auto companies. Ford, Chrysler and GM are primarily assembly companies and are completely and utterly dependent upon those third parties being able to provide parts to meet the demands of assembly.

Recently, the UAW staged a strike at American Axle for the sole purpose of showing GM just how much control they have. The strike at American Axle bankrupted the supplier, forcing GM to buy a stake in the company to ensure that they would continue to receive parts once the strike was over. GM was also forced to sign new contracts with other suppliers to build the parts in case American Axle was lost forever. Doing so incurred great costs for GM and its new partners to supply redundant tooling to build those parts.

This is just an example of what killing a supplier can do to GM. Now, imagine what would happen to all of the suppliers with contracts with GM if GM went bankrupt and could not pay their bills? Do you think the suppliers can absorb the contracts of the world's largest auto manufacturer? How do you think they do that? They raise prices for the other customers? No, those customers have locked in prices. There is nowhere for the suppliers to recoup these losses. The suppliers start going out of business, tumbling like dominoes. As suppliers go out of business, the situation with American Axle gets played out for every car manufacturer in America, except on a huge scale. Ford, Chrysler, Honda, Nissan, Toyota, Hyundai, VW, BMW and Mercedes would all suffer incredible parts shortages which would prevent them from producing cars which then leads to lost sales. Without sales, car companies go bankrupt. Chrysler and Ford would simply be unable to whether this storm, and Toyota would be immensely damaged as the US is their most important market.

The loss of these companies means the loss of jobs. Auto manufacturing is a very high tech business, from top to bottom. The auto manufacturing industry has been a technology driver for decades. The loss of such important customers would mean huge losses for tertiary suppliers such as Cisco, Microsoft, Oracle, Cray, HP and engineering partners such as Jacobs Engineering. Not only will blue collar jobs be lost in the auto industry, but white collar jobs in tertiary industries will be lost as well. All of these job losses will place an enormous load on the US economy, much more than the $25B loan that the auto industry is asking for.

Ask yourself, how much do you really want to see GM and the other "Fat cats" get their due? When you hear the media complaining about the bailout, think about the fact they don't have your best interest at heart: they are trying to sell commercials and newspapers, and they need controversy to keep people plugged in to do that. When you complain to your congressman about the bailout, do you really understand what it is you're objecting to? Republican congressmen then do vote in line with their constituents, and if people keep complaining to them for long enough, the congress will become paralyzed, nothing will get done, and one of our most important economic engines will crash, taking down nearly every other industry in America with it.

And if you live outside the US, you should think twice about cheering such an outcome. America is the worlds largest importer of manufactured goods. If you remove our demand for your products, where are you going to sell them? You'll either have to sell them at a much lower price due to the lower demand, or you'll have to cut production to meet the demand. Reduced production means eliminating jobs. Your jobs.

Don't be a victim of the fear machine. Help Congress do the right thing for the American and world economies.

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15 Comments

UnknownNov 21, 2008

You make a clearer point than most, Payton, but I'm curious...

It's been said that GM is burning through $2B/month and that they have less than $16B in reserves. Now, bailout or not, they're going to have to shed entire brands and numerous products in order to position themselves to weather these lean times. Considering they are large enough that it's going to cost them even more money to do the necessary downsizing (breaking contracts, severance packages, et al), how far can their share of a $25B sum really go?

I'm all in favor of saving the jobs and the industry as a whole, but I feel they made their beds when they decided to dilute quality through badge engineering and focused on building a small handful of high quality, top tier models targeted at competition with the Germans whilst cranking out lackluster products for the general public, the vast majority of which, I suspect, were purchased by rental car companies. They've been making vehicles for the European market for decades, and that's a market wherein fuel prices have long been higher and where people purchase cars for the long term (as opposed to our highly consumerist culture stateside). They know what it takes to build quality vehicles anywhere else in the world you might go. They just chose not to do so in their own back yard.

I think it's unfortunate that so many are going to endure so much because of this vanity, but we've been living beyond our means - as a society - for too long and it's finally catching up with us. Remember, when GM was raking in billions in profits a few years back, they were investing in new production facilities in Mexico in order to eke out every last dime, cutting these jobs they are now preaching as dear and precious all the while. To give any of these lame horses more money will just delay the inevitable and make it easier for them to come back and ask for more in a few months, after they've burned right through it with little, if anything, to show for it. They'll take that money, pay their suppliers, then cut the jobs anyway. Then they'll come back pleading for more, only this time around, they will have to get in line with the major players from the next industry in line for a hand out.

There is absolutely no truth in the populist belief that the American manufacturers build crappy cars. It's actually a fact that for several years now that Ford and GM have had quality on par with (and in Ford's case often leading) quality from Toyota and Honda in nearly every category. The truth is that the UAW didn't start giving a crap about quality until the 90's despite the efforts of the engineers to make the cars and manufacturing processes better; and by the time the UAW came around and the quality started going up, the public relations battle was lost.

It is most definitely NOT inevitable that these companies will fail, especially Ford. GM is STILL the biggest and best selling manufacturer in the world. The problems at hand have everything to do with credit problems, the out of control environmental regulations and safety regulations. Compared to 1989, there are more than 500 pounds of mandated safety equipment in every car and light truck. To put that in perspective, the 1989 Honda CRX weighed 1800 pounds. A Smart4Two weighs over 2300! That 500 pounds cancels out all of the efficiency gains from modern engines. That's like hauling around 3 extra normal sized adults all the time (which you cannot even fit in a CRX or Smart4Two). Not to say that safety equipment isn't good, but it's just indicative of how much the government demands on putting conflicting regulations in place that cost extraordinary amounts of R&D funds to accomplish.

We cannot regulate and regulate and regulate and demand and demand and demand of our car manufacturers without helping them. The Japanese government and the EU are constantly giving money to their auto industry for R&D, yet when our government promises $25B in R&D funds for mandated improvements in fuel economy, they don't actually release the funds until the R&D is completed. That means that the big 3 have to self-fund the research in the hopes that they meet the ever-moving targets set by congress and the EPA. GM and Ford and Chrysler are losing because they are not playing on an even field with their over-seas competition.

Finally, you cannot compare fuel efficient European models to cars sold in America. Just the added safety and EPA regulations alone add weight and reduce power, both of which result in poorer fuel economy and yet smaller vehicles which most Americans simply do not want en-masse. Families in the US are larger than those in Europe (and I'm not talking about waist size) and so little four-seat hatchbacks with tiny engines aren't practical for a family car in the US.

Japan has to mandate that a specific number of cars sold be tiny death-traps to sell enough of them to achieve their goals of reducing congestion in their extremely dense cities. If these cars weren't forced upon people, I doubt highly they'd be as "popular" as the press makes them out to be.

One of the points of this entry was to get people to look beyond the hyperbole of the media. The media is not looking out for your interests! There are two groups of people in the media: Profiteering executives who want controversy to get ratings to sell advertising, and hyper-sensitive liberal editors and reporters who can find fault in anything and preach about how their liberal approach to the problem is the only correct approach. The fact that people are constantly bombarded with these ideas that they know at their basic beliefs conflict with their common sense helps to create this conflict which creates interest (good or bad, it doesn't matter) which gets people to turn on their TVs and Radios.

THINK! Don't be a lemming! If you are thinking and still disagree with me then I'm fine with that. I'd be scared if everyone agreed with me, but it also worries me immensely when it's obvious that large numbers of people don't bother to educate themselves on issues and depend 100% on the tripe preached on CNN.

Part of me actually wishes the U.S. auto industry would fail. I hate the idea of any of these buyouts because I hate the idea of big government. The more money the government gives to an industry, the more they will stick their grubby little paws into the day to day workings of that industry.

If a full auto indutry failure were to happen, though, bye-bye UAW and paying somebody $50,000 or more a year to install 10 bumpers a day. The U.S. auto industry is a giant sucking pit of waste and bailing them out is not going to help anybody learn how to better run the industry. All three have become mega-corporations and because of how huge they have become, the American public has to bail them out even though they can't balance their own checkbooks.

If they did fail, smaller investors would buy out the assets and we would go back to many separate car companies instead of 3 gargantuan ones. It would take a few years but the industry would bounce back, leaner and smarter than they currently are.

I know it won't happen, though, because a failure of three companies the size of Ford, GM, and Chrysler would cripple not only the U.S. economy but the world's as well.

The devil on my right shoulder says screw 'em, let 'em fail while the angel on my left shoulder says we need to help them out for the good of the average person. I hate when the angel makes more sense... :)

Now if I could just get the government to pay off all my debt, the world would be a better place, right?

You really have no clue at all what you're talking about, do you? First, Chrysler is the only auto company that the government has bailed out. Second, you have no idea how many millions of jobs would be directly lost by the big 3 and their parts suppliers, and how many millions more would be lost in tertiary suppliers and the domino affect that would happen throughout the whole economy by having such a drastic reduction in employed people. You may not like the auto industry, but their is no denying their absolute importance to the fundamentals of our economy.

To be secure in this in-secure market situation, we all have to follow the basic rules:

1. Do your current assignment to the best of your abilities
2. Update your skills
3. Keep your eyes and ears open to the happenings within and outside your company.
4. Have a back-up job offer
5. Do not believe your Top Management's pep-talk.
6. Reduce your personal expenditure
7. Talk to your spouse and kids.
8. If possible take help from your good friends in getting job leads
9. If your boss pursues you to take salary cut or not so important project, say YES.
10. Last, but most important, BE POSITIVE.

Regards,

UnknownNov 25, 2008

Oh my. Not a lemming, sir. Turned off the cable almost a year ago and only use the TV to play my Netflix these days. Just a dyed-in-the-wool gear head more tuned in to this market than most.

I'll concede that GM has made marked quality improvements in the last twenty years, but there's more to it than that. The vehicles need to be desirable and they're not. When the new Malibu was awarded North American Car of the Year, you would think that this meant it was exactly what we'd all been waiting for; a cleanly styled American sedan with high build quality, respectable performance, and confident handling. What does it say about this car when more than 50% of them are bought by rental car agencies and the like (fleet sales)? It says that the American people aren't interested in it. Why should the American people save a company that builds products the American people obviously don't want?

Test drive a new Cadillac and a new BMW. The differences in both build quality and chassis performance are immediately noticeable. BMW has focused on consistently improving their range, selectively adding new models over time. GM, on the other hand, has focused on re-badging and On-Star. Of the top 6 most popular cars sold in America, the only GM product, the Malibu, is in 6th place and we already know more than half of those are sold to fleets. Why should the American people save a company that obviously doesn't take the demand for quality/performance improvements seriously?

We could talk cars all day and still miss the point. The real threat here is the loss of jobs and it's unfortunate, but I still think that GM is far too big given the demand. It is their short-sighted business plan that's gotten them into this mess and now we're all on the hook to bail them out. Fine. I just think it's unfortunate that we're going to suggest that the media is opening the penthouse window for the American people to toss General Motors to the wind when GM is playing their own propaganda game. (Not that I don't approve of big media bashing in any way!)

This isn't an all-or-nothing solution. Throwing money at GM now isn't going to save three million jobs. It's going to probably save less than half of them. The second order effects of those lost jobs are going to ripple outwards just as effectively as if the whole lot went under. And if it wasn't as bad as it is, they'd be preaching that 1.5M jobs lost as the end of the world all the same. Check out their fact-and-fiction propaganda site and, if you look closely enough, you'll see they're playing right along. Example? They report that sales of the Enclave are up 124% over last year. That's outstanding until you figure the model didn't exist as a 2007 model and they only sold them for about three months.

If they are such a viable business venture with so much going for it, how come they weren't prepared to handle the situation? How come they so desperately need for us to socialize the losses of big business in this country after all these years of unbridled, privatized gains? Whether they get their billion dollar bailout or not, hundreds of thousands of jobs are going to be lost.

It's like being presented with an offer like this: Your house and everything in it will burn to the ground and you will lose everything. Or, you could give the government $50,000 and they will make sure that the fire merely guts the structure, leaving you a remote chance that you might be able to salvage something inside.

I say they should be allowed to fail and all this money we never knew we had (sarcasm) should be used to put those people to work a la New Deal. There are infrastructure projects in need of resources. We could be remodeling every school in the country, we could be bringing critical medical care closer to rural communities. We could be building a high speed, electric rail system to carry passengers across the continent. We could be doing great things in terms of investments in the future of America, but they would have us all believe that there is no future without General Motors. I disagree.

Your arguments seemed somewhat reasonable up to: "I say they should be allowed to fail and all this money we never knew we had (sarcasm) should be used to put those people to work a la New Deal." This shows you don't have a firm grasp on history. The New Deal has been economically proven to have extended the Great Depression as none of the public works projects resulted in long term job growth. What saved the economy? WW2! What industry drove that salvation? The auto industry and their capacity to create the tanks and jeeps and other vehicles used to win the war.

Don't believe everything you read; and please stop intimating that this is a bailout where money is being granted to the Big 3. It's loans, just like they get from the banks on a daily basis for operating cash. The difference is that they've come to the realization that what they need to fix their problems are loans that are far bigger than any banks are willing to make considering the current turmoil in the banking industry.

You wrote: "You really have no clue at all what you're talking about, do you?"

Did you even read my entire post or did you pick one or two sentences out of it and decide to type out a quick, rude retort?

You continued: "First, Chrysler is the only auto company that the government has bailed out.

There are multiple bailouts in the works by our government right now which include a possible bailout of the auto industry. I was referring to ALL of the recent bailouts, not just the one for the auto industry. I'm well aware of the fact that Chrysler is the only auto company that has ever been bailed out.

You continued: "Second, you have no idea how many millions of jobs would be directly lost by the big 3 and their parts suppliers, and how many millions more would be lost in tertiary suppliers and the domino affect that would happen throughout the whole economy by having such a drastic reduction in employed people."

I'm fully aware of the reach and importance of these companies as I wrote in the fourth paragraph of my post:

"I know it won't happen, though, because a failure of three companies the size of Ford, GM, and Chrysler would cripple not only the U.S. economy but the world's as well."

Yet more: "You may not like the auto industry, but their is no denying their absolute importance to the fundamentals of our economy."

I have no problem with the products created by the auto industry in the U.S. I own a Dodge Charger and I love it. I have never owned a car that was not an American brand. My problem, as I mentioned in my post, is with the idea of a company becoming so large that the government needs to step in, spending MY tax money, in order to bail them out and avoid an economic crisis.

Free market means you manage your own business. If you fail, you go out of business and somebody else either picks up where you left off or the industry fails. What we have today is not a free market economy. We have huge conglomerates that, when poorly managed, force the citizens of the Unites States to spend money on bailouts. We spend money every day on their products but because the have managed themselves into bankruptcy, we need to spend more money, while receiving no product in return, just to keep them afloat.

I KNOW a bailout is necessary for many reasons but don't patronize me and tell me what I do or do not know just because you can't (won't is more likely), understand the point I'm trying to make.

Small government is good government, and $800 billion in government bailouts means the government becomes more involved in the day to day operations of our largest corporations. That equates to larger government, which goes against everything that is pure about a free market economy.

UnknownNov 26, 2008

@Payton: Thank you. My mention of the New Deal was merely meant to relate investments in American infrastructure on a massive, federally supported/funded level without extending an already lengthy post. I'll admit that my grasp of history on that level is not what it should be, but I was well aware that the war did more to stimulate the economy than did the Deal.

The crux of my argument is this: The automakers, GM in particular, are pitching this bailout as needed to prevent some three million jobs being lost. It doesn't matter if the bailout comes through or not, the jobs are already gone. Their quality has improved, but it is not enough. Their catalog is ripe with drab and mundane examples of badge engineering. The American people, as individuals, are NOT interested in their vehicles and are not buying them. They are severely over-staffed and, should they survive, they are going to shed jobs by the thousands.

I recognize that it's essential that we do whatever is necessary to preserve our economic engine, but this bailout does nothing to change the fact that enough jobs are going to be lost between now and next summer to seriously damage our economy. If GM goes under, it will send a message to every other industry in the country that there are no more handouts and they can either get serious or meet the same fate. Perhaps those who lose their jobs will not lose them in vain. It will mean something and be a catalyst for increased personal responsibility in this country.

And, re: intimating bailout. They are asking for ridiculous amounts of money that they have long since proven they are incapable of managing even marginally. Monies that they have not earned. It is a bailout in every sense of the word.

"I know it won't happen, though, because a failure of three companies the size of Ford, GM, and Chrysler would cripple not only the U.S. economy but the world's as well."

Yet more: "You may not like the auto industry, but their is no denying their absolute importance to the fundamentals of our economy."

I just don't understand this mentality. What is it that makes people perfectly willing to destroy the lives of others because they don't like the way a company runs its business? Never mind the fact that the companies in question have been assailed by the government repeatedly since 1968, leaving them perpetually unable to catch up to the competition which is less burdened and subsidized by their home governments. You keep trying to push this idea is that it's all GM's fault and that we'd all be better off without them. That's simply not the case!

Small government is good government, and $800 billion in government bailouts means the government becomes more involved in the day to day operations of our largest corporations. That equates to larger government, which goes against everything that is pure about a free market economy.

There's a difference between a bailout (loan) and an investment (purchase). I am not at all happy that these loans to the banking industry are conditional based upon allowing the feds to buy stock in these banks. In many cases these banks are going to have to make stock offerings specifically to the feds which dilutes the share price of current stock holders. What I would prefer to see are simply the loans we were told was going to happen without the strings attached. Buying mortgages as was the original plan would certainly see a ROI for the American taxpayers in addition to loan interest. Now, the first $700B is basically spent on buying banks and now they want another $800B to do what the first $700B was supposed to do. Fortunately the auto makers are not asking to be bought out by the Government and simply want to borrow money the same way they do from banks.

If you take out a short term loan with your local bank to make payroll in a down sales month, are you considering that a bailout? This is how businesses operate every single day. The real issue is the true hysteria that you've obviously been whipped up into along with most Americans.

I liked pksri93s list of how to 'last' in this economy a lot. Makes absolute sense and I would only add that all people should try to find out what makes them happy/ motivates them so that the job can be viewed as a privilege to have. Really it is!

The CAR industry - one of my fav subjects. I realize this blog is from end of NOV2008 and today once again the Big Three were back in DC asking for the big bail-out only this time with a plan (supposedly). I have not looked to see what they all presented...bit I awoke this morning with this thought:

We should bail out 1 or 2 of the Big Three...and here is how we should choose who to assist financially. Let them all compete with their business plans, like companies going to the bank with their best possible-well-thought-out-plans and let the government or the people who will decide who gets the money, base that on the FORD, GM, or Chrysler with the BEST business plan to retool their products, cut cost of goods, and pay back their debt after the fact!

Competition makes us all great...make them compete! I doubt seriously if any of them would have wasted time with that ridiculous appearance last month, with no business plan!! What??!!

It looks like only two of the three need a bailout. As I have said before, Ford is in pretty good shape compared to GM and Chrysler. Ford has only asked that Congress authorize a $9B line of credit that Ford would only tap in the event that either GM or Chrysler were to fail as Ford would incur additional costs in ensuring suppliers don't go belly up.

That's not true. Since Q1 2008 until today, Toyota has exceeded GM in both volume and revenue. And even last year, the difference in sales volume between Toyota and GM only amounted to 3,100 cars.

To top this all off Toyota has substantially higher revenue then GM, and turns a large profit. Also Toyota has a market capitalization which is orders of magnitude higher then GM (which along with the other 2 American car makers, are converging to worthlessness), at this point, Toyota could actually buy all of the big three with a fraction of the money it makes in profit per year.

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Follow the daily successes and challenges of an Enterprise Architect as he navigates the world of enterprise software development using C#, Java, and whatever other technologies are necessary to get the job done. With over fifteen years of professional software development and IT management, Payton brings a unique insight to the world of IT.
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